Low mortgage, high debt
But the good news is that sub-prime lending in the U.S. hasn't -- and won't -- hit Canada
By LINDA LEATHERDALE, MONEY EDITOR
I remember being sneered at when, at a real estate forum, I warned subprime lending could be a train wreck waiting to happen.
What I worried about was undesirable brokers feasting on buyers with bad credit ratings by enticing them into the housing market when common sense ruled they shouldn't qualify at all.
No-money-down deals, longer amortizations and even leverage through cash-back deals all helped dangle the carrot in front of their faces.
At the event, a fellow journalist was quick to chastise me. Mortgage brokers, he pointed a finger in my face, help people get into homes with cheaper lending rates, and that helps the economy.
I'm all for helping people make their home dreams come true. I lobbied for 5%-down deals and borrowing against y! our RRSP to buy a home. I also held real estate seminars, which led to the Toronto Real Estate Board awarding me the Advancement in Home Ownership Award in 1991.
But in the new millennium, I was worried about a growing pile of complaints on my desk by overly indebted buyers who lost everything when the lender foreclosed.
I've written about many of the horror stories.
Well, now the train wreck has happened in the U.S., where lending to people with bad or checkered credit rating exploded to $570 billion US last year and helped burst the housing bubble. Mortgage arrears has soared to 14%, while default rates hover at 8%, and some 44 subprime lenders have gone belly-up.
Now the cry is for U.S. government to bail out these poor souls. "The federal government can send in an infusion of (money) to prevent foreclosure," said Senator Charles Schumer, a New York Democrat. In Washington yesterday, several lawmakers were demandi! ng hundreds of millions of dollars be lent to these subprime borrowers to avoid foreclosure.
Could this happen in Canada?
No, says Bob Ord, chairman and CEO of Mortgage Architects. In his report, Why the U.S. subprime fallout is a U.S.-only phenomenon, he explains why.
For starters, Canadian lenders are paid for the deficiency on sale, and can pursue wage garnishees, he said.
Ord also claims 50% of defaults end up curing themselves. In other words, the lender gets full loan amount after the borrower sells the property or borrows money elsewhere.
Ord also points out that Americans can deduct mortgage interest, which is a disincentive to build and retain equity in a principal residence.
But more importantly, the subprime market is much smaller in Canada, with lending accounting for only 5% of the mortgage market, and delinquencies at only 3.8%.
"While exotic mortgages are making their way to Canada, their share of the market is too small at this point to hav! e any material impact," said Ord.
Meanwhile, signs that Canada's hot housing market is starting to slow down showed up in latest housing start numbers, with a 10% year-over-year drop in the first quarter. But experts at Canada Mortgage and Housing Corp. say don't expect a crash.
If anything, letting a little air out of the bubble means no crash at all. The construction softening was felt in most parts of the country, with Ontario's first-quarter starts down 23% year over year, and Toronto's also down 23%.
"A decline in new home construction is forecast for Toronto in 2007," said Jason Mercer, CMHC senior market analyst for the GTA. The active condo market was hit, too -- but with record pre-construction sales, don't expect the sky to fall here, either.
According to Mercer, the pace of condo apartment starts is expected to pick up for the rest of the year and into 2008.
Last year, 13,338 new condos fl! ooded the Toronto market, after a record 14,376 new condos in 2005.
Don Campbell, author of Real Estate Investing in Canada, is worried about more supply, than demand -- pointing out this year there will be 1,100 more condo units on the market than demanded by buyers.
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